Do I focus on Paying off my mortgage?

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Hey Everyone!

I'm closing on my first property that I will be house hacking with. I'm in a condo with a buddy paying me rent. I will have a $220k 30-year fixed rate mortgage at 4.875%. Using amortization calculators I noticed I could pay off the loan a lot faster by adding extra payments. It's a little scary seeing I'm paying the cost of the condo just in interest after 30 years.

With that said, if I want to buy another property in the next 5 years should I focus on paying down the mortgage on this current property? If so, by how much? I have the extra income to be paying up to an extra $1k per month which significantly shortens the life of the loan. What are advantages and disadvantages?

Thanks!

[Geoff Garrett]

Advantages of paying of the loan: you have a smaller debt on your balance sheet. You also pay less interest over the life of the loan

Disadvantages: You are locking up money in the property that you cannot easily access unless you refi or take a HELOC. Another thing to keep in mind is if you need to refi to get money out in a couple years in the future for your next down payment there is a big possibility you will be doing so at a higher interest rate.

If you pay more down you are not reducing what you are paying monthly just shortening the number of payments in 25-30 years.

It looks to me you are in a growth stage and having a stable predictable property with more debt (paying off at a regular rate). Then saving the extra money for an emergency fund as well as your next down payment is much more important.

Also when you go to get the second mortgage the bank is going to care more about you having reserves (more cash or assets that you can easily make liquid) than seeing you have paid down you mortgage some.  

(I super simplified this not taking into account reduced interest from accelerated pay down)

Example 1:

Mortgage 150k (paid down additional 50k) and 50k needed for next downpayment.

Monthly mortgage payment $1000 (not including taxes insurance etc)

Cash left after 2nd purchase $0

Example 2:

Mortgage 200k, 50K needed for downpayment, 50k in reserves

Monthly mortgage payment $1000 (not including taxes insurance etc)

Cash left after 2nd purchase $50k

Which example looks safer? Number 2 because you could lose your income and still be able to make payments for a long time. So a bank will be much more willing to lend to someone who is more liquid.

Also when you make additional payments it affects the payments at the end of your loan (last 5 years of the loan) Think in 25 years how much the rent will be expected to be by then.  I expect much higher than it is now.  So you are looking to spend more dollars on your property when you have the lowest cash flow to eliminate payments at a time when you should see the highest cash flow.

Let us know what you decide!

Geoff